Box delays its IPO to raise more private cash, but at what cost?

It’s not a great start to life as a public company when you’re forced to “time” your IPO to the whims of Mr. Market.

Alas, this is the state of affairs for Aaron Levie’s presumed troubled enterprise storage and collaboration company, Box.

Today, the WSJ reports that the company has raised a fresh $150 million in private capital and further delayed its long-awaited listing, some 16 (looong) weeks after filing its pre-IPO paperwork in March. This funding round, which according to Journal sources includes private-equity firm TPG and hedge fund Coatue Management, puts the company in rare, and unwelcome company, as just 14 of the 124 companies going public in 2012 and 2013 needed to raise a similar round between filing and ultimately listing. (The anonymous filing provisions of the newly passed JOBS Act may have played a small part in the timing of Box’s S-1 filing.)

Box hasn’t come out and explicitly said it’s attempting to time the IPO markets. But it doesn’t need to. Box had the misfortune to time its not-so-healthy-growth story with a major market correction in the enterprise SaaS sector that saw category stalwarts like Salesforce and Workday lose massive market share without reporting any negative news. It’s an inhospitable environment for the healthiest of companies. Box is anything but.

When the company filed its S-1, the reaction was almost unanimously negative. In the year leading up to the filing (ending January 31), Box lost more than $168 million despite generating $124 million in revenue. This left the company with just $109 million in cash at the time, less than eight months of runway at its then current burn rate.

Sure the company was growing its top line, but if every dollar of new revenue means another $1.35 in losses, that’s a hard pill for Wall Street to swallow. Box bulls will tell you that the company will one day be able to reduce its hefty sales and marketing spend and thus deliver a much more attractive income statement, but when and how meaningful these changes will be remains anyone’s guess.

Levie discussed the pressure to IPO (or supposed lack thereof) during an exclusive interview at Pando’s Southland conference in June, saying, adamantly, “We don’t have to go public.” In the same breath, however, he followed up with, “...but we’re sort of going public. We certainly haven’t launched our roadshow, but going out in a market where it’s more calm, not necessarily that the highs have to be as high as they were, but certainly the volatility has been suppressed a little bit, that’s I think important.”

Of course, Levie is right. Box doesn’t have to go public. But its other options aren’t much better. The Journal reported in May that the company’s bankers, apparently discouraged by the early market reception, went rogue and began exploring options to sell the company rather than list. From everything we’ve heard, the reaction among the short list of potential buyers wasn’t much better.

So that left Box staring uncomfortably at door number three: raise more private cash. The fact that it could do so proves that things aren’t as terrible as some have opined. But there’s still a lot we don’t know about the terms of this round that would shed more color on the company’s state of being. It’s also highly atypical that a company would add a new board member so close to its IPO, late-stage growth round or not.

Yes the company found willing investors, but at what cost? The latest round was essentially flat in terms of valuation, coming in at $2.4 billion, only a sliver above its December 2013 valuation of $2 billion – liquidity preference and other potentially onerous terms notwithstanding. That’s not the signal of strength that the company would like to project to potential public market investors. What’s more, this round adds even more dilution to the company’s already bloated cap table. Remember, after nine years and six rounds of institutional funding, Levie had been squeezed down to only a four percent stake in Box, prior to this latest round.

But the real poison pill may come in the form of a mercenary funding covenant that TPG has become known for in this type of late-stage round. According to the Journal, “The firm often requires companies to guarantee they will sell shares in an IPO at a higher valuation than the last funding round or else forfeit additional shares. It is unclear whether Box agreed to such terms.” With Box’s $2 billion valuation already on shaky ground and Wall Street’s confidence in high-burn rate growth stories painfully low, such a provision would be a major gamble indeed.

The company is expected to revisit its IPO plan at some point between Labor Day and Thanksgiving. In the meantime, it will need to post another quarter’s worth of financials. So the obvious question is, where does this leave Box? The company is reportedly trimming its burn rate, and the fresh cash certainly buys it another one year-plus of runway. But keeping the lights on is not what shareholders in multi-billion dollar companies aspire to.

For Box to be considered a success, the company will need to command a valuation of at least $4 billion – be it in the public markets or via a private acquisition. Given everything we’ve seen from the company of late, this is looking like a long shot indeed. Today’s funding news does nothing to change that.

Then again, this isn’t the first time Box’s business has been questioned by high profile investors, having seen Mark Cuban sell his early stake in the business after a disagreement over its direction. That was nearly a decade ago and the company is still alive and kicking. The question is, how many Houdini acts Levie has up his sleeve.